High P/S last as long as the fundamentals entail they do. Markets will move up and down and things will adjust up and down, but they never adjust really down until there is a change in fundamentals. They always stay expensive unless the business model breaks.

I hear these examples that Netflix once had a price to sale of 1.8, NVDA something similar, etc. Fine, go buy the universe of low price to sale stocks and hope a few grow their multiples. You simply cannot systematically do this.

Thus, how do you find SHOP, ANET, NVDA, et al.? (1) extremely high relative strength (sorry, you won't find it at the bottom), (2) it is considered "expensive". Thereafter you can read into the narrative etc.

There are points in the life cycle of almost all these stocks when FUD, serious FUD hits, or if not FUD the market just crashes and everything crashes with it to abnormally low levels and everyone panics, says we had a party, etc.

Nutanix, when was the big money made on Nutanix? Buying at the IPO, buying when it dropped below IPO, and perhaps buying in the recent October crash.

Big money made on Netflix, hey, you guys already discussed them.

But there is something about companies that have market caps that are extremely small relative to their TAM. Those stocks can appreciate for extreme returns even when "expensive" because they really are not.

The market is a discounting method for risk/reward. Therefore a company like Zscaler cannot be valued at 1.8x sales. Why? That means, just to maintain the same multiple ever year the stock will grow by 50% or more every year. There is no discount for risk. And thus, since everyone knows this, greed being the rule of the game, investors will bid for Zscaler at 1.8x to get these near risk-free extraordinary returns and in their desire to own Zscaler they will big the price to sales multiple up. So be it.

However, since there is great uncertainty as to what the opportunity really is there will be large price swings. Sometimes enthusiasm will grow to high, sometimes pessimism too low, but given the large price swings, there is also a larger annual increase in share price from bottom to top. And further, given the growth rate and often growing CAP, the price must go up to maintain the same discount rate.

This discount rate can be problematic for the market. The market is use to returning to the mean. As profits grow competitors jump into the market and drive profits back down. Thus why CAP is so important. Rapid growth is great but it will attract competition and without CAP there will be no exceptional returns as competition eats up the profits even as the market grows.

Given this presumption of return to the mean the market always misses on the discount rate and undervalues the stock, except in times of extreme enthusiasms and clearly in bubbles.

With Zscaler there is a common sense recent evaluation from a well educated CPA/Financial MBA sort of guy who is credentialed. He starts by stating that (1) sequential growth is slowing (he used conventional analysis that was wrong and contradicts himself) and he ends with (2) "Although big players have not YET transitioned towards the cloud-based deployments of security solutions the prospective growth in the industry will certainty {attract them}." I emphasized "yet".

Why have not big players done so? Because it is disruptive to their business models. They are moving to the cloud, they are bragging about it, but they are not doing so in a manner that disrupts their business models. Meaning supplementary hybrid cloud virtual machines that work with the appliances to provide "cloud" based security.

Thus the market conventional wisdom as exampled by this person's analysis assumes return to the mean - even when there is no competition that can be named that presently exists.

That is the theoretical reason why "expensive" is really not so even though it may seem so - except in times of extreme enthusiasms and for sure in bubbles.

Trust me, I'm out in a bubble. And yes there will (inevitably in such investments) be extreme volatility (it is built in), and yes there is risk (every investment has risk) but the risk is not so much valuation except in extreme circumstances but in continuing business fundamentals.

With Zscaler multiple sources (including the above) and including Zscaler themselves indicate that there is nothing else like them. Is what they have what the market wants or will the larger player strategies of not cannibalizing their businesses and providing hybrid virtual machine spin-offs for cloud deployments be what the market wants? Will this latter model be able to morph to provide more and more value and not cannibalize their businesses at the same time, relative to Zscaler.

Who knows. Sometimes the hybrid works, sometimes it does not. And perhaps Zscaler will continue to add more and more functionality and value to its solution and add to the ZIA and ZPA portfolio to provide a more complete solution to not only service the greenfield internet breakout opportunities (which is quite large) but also to go straight after the appliances themselves (something Zscaler only does incidentally at present).

Or perhaps Amazon will just build something and go boo! I don't know.

But that is the theoretical framework that explains the contradiction between the risk of low valued stocks vs. high valued.

If that company is growing 50% per year, then the stock price can appreciate 50% per year and maintain the same P/S (ignoring increases in shares, I guess).

Not that 50% gain is bad. Just saying that the 200% type gain that puts a stock into the 20-25 P/S range probably won't get repeated in a following 12-month period anytime too soon.

Otherwise the P/S becomes 40-50-60...at what point do we say that is Juniper-in-late-90s absurd?

Also...at some point the stock, ala Arista, sees their growth rate tick down. Suddenly all stock price appreciation ceases, so that the stock's P/S comes down.

So you have to bet on these factors:The stock will grow at 50%, or more, for next 3-4 years or more.

And in that scenario you should plan on getting out in year 2 or 3, because once the growth stops, the stock growth plummets.

So I am arguing that it is irrational to think MDB can double in stock price in next 12 months, if their growth rate stays consistent at 50%, because their current P/S is already factoring that kind of growth in for next couple years.

So I am arguing that it is irrational to think MDB can double in stock price in next 12 months, if their growth rate stays consistent at 50%, because their current P/S is already factoring that kind of growth in for next couple years.

In fact, many of these higher P/S stocks weren't that high a year ago BEFORE their big run this past year.....but now they are...like MDB, etc.

So agree Dreamer....either these multiples have to compress or these stocks must be able to sustain a high P/S for a few years....and other than FB....very few have been able to do that.

If we assume the latter, one could see these stocks growing at the rate of revenue growth...assuming they could ALSO sustain the high P/S at the same time.

This is really a great discussion and on the FEV thread.....what holders of these stocks are saying is the equivalent of "buy low sell high doesn't apply.....we are buying high and wanting to sell high or even higher".

I don't know. I am looking at my tracking port today and stocks are massively falling across the board and there appears to be no correspondence between price to sales and extent of the decline. In fact AYX is only down 2.64% while PSTG is down 6.44%.

Here is a year to date chart, certainly just a few random choices, but to a stock those with higher price to sales have outperformed those with much lower price to sales:

This said, NTNX will probably outperform from its bottom in the crash; NVDA will probably start to outperform again {but only after a lot of patience}, will PSTG or ANET outperform again despite their much lower price to sales? NTNX and NVDA because their fundamentals will end up re-asserting itself (Nutanix is already doing that, NVDA will have to actually get the fundamentals to resurface).

As such, the one correlation that appears to be the case, higher price to sale stocks with the fundamentals to support it outperform lower price to sale stocks, including those with either fundamentals or fundamentals that will probably reassert itself in the future. The one exception is a true FUD event that the market clearly got wrong (not just we wish it got wrong).

Another notorious more "reasonably" priced stock that is anecdotal of course but perhaps most persuasive is Talend. It always had a price to sale that appeared to be much more reasonable. Year to date return on Talend...same as all the others.

In the other thread I posted Microsoft even in early days when it was growing top line at 50-100%/y much like our stocks now had a P/S of only 4-8. These times due to a variety of reasons we have much higher valuations thus depressing future stock appreciation potential.

Let’s assume MDB could be generating $2 billion in revenue in 10 years. If we put a P/S ratio of 8 on it that’s a 16 billion company, roughly 3-4x current prices. That’s 13% annualized. While it’s on the low end of what we’re shooting for it is above historical index returns at a time overall valuations historically are followed by smaller gains. Besides that I just used numbers I totally randomly cane up with.

Salesforce.com had 748 million in revenue year ended January 2008. 20x sales would have made it a $15 billion market cap. Had you bought at 20x revenue and held to today’s roughly 8x sales you would have enjoyed 21% annualized. Instead crm traded much lower than 20x sales back then and was therefore severely undervalued. If it continues to grow as it had been it is still undervalued.

Take a biotech with no products on the market but potential blockbusters in the pipeline. Their only revenue is royalties from partners hitting milestones in development. We do not value biotechs at p/s but instead a discounted formula based on future peak sales. Why would we not value Saas stocks or MDB in the same manner? Why does it matter if they’re at a current run rate of 100m or 260m revenues and with their corresponding p/s ratios, when, 10 years from now they will be registering 3 billion in revenue?

To me, market cap relative to tam, and what direction tam is going, is a better measure of valuation. Quite frankly I don’t know the tam of nosql databases. For all I know 10 years from now it could be bigger than MySQL. Or it could be lower.

I don’t know. All I can tell you is market cap relative to market seems more relevant. There are too many unknown variables to put a proper valuation on these companies. This is not like valuing Clorox co. Too many unknown variables compared to a mature stable market like bleach.

I do acknowledge higher valuations created volatility and harder falls when things slow down, which is why i do my best to try and stay in growth stocks that have odds in their favor for continued growth. Not flash in the pans.

I subscribe to the Philip Fisher methodology, which is basically don’t worry about valuations. Don’t even sell if it’s overvalued when you believe it will be much bigger in the future. Just try to buy when they stumble and are temporarily out of favor in the market. I have followed stocks For years waiting for them to become cheap. I followed MA from it’s IPO waiting for it to be cheap. Even during the 2008 bear many of the truly great companies never became “cheap.”

I’ve been reading articles where people keep bringing up p/s ratios and they start recommending also-rans because they have lower valuations.

Microsoft came to the market at the very beginning of the personal computer market. It was so nascent that Xerox gave away GUI for free to Apple, and IBM had no interest in the operating system, giving Microsoft ownership of it. Few understood it, and Microsoft went to great lengths to try to educate the market of the concept of increasing returns, not the typical return to the mean, high capital costs, etc. Bill Gates found himself frustrated in regard. In the end it idd not matter as the market worked its magic. But again, an example of how the market systematically undervalued the "overvalued". It is one of the advantages that smaller investors have, is that we do not have to have market beating returns every quarter.

Microsoft also never had a 100% yer over year growth in its history as a public company. But it continued to grow substantially each year with no real competition.

Microsoft rev. went from 140M to 1.2B in 4 years (1986-90) and its stock price appreciated 6x and its P/S went down from 5.5 to 3.8.

We can call something under or over-valued. But ultimately it comes down to math - i.e. the stock price is a sum of discounted cash flow. If for whatever reason someone had paid a P/S of 20 for Msft back in 1986 then their return would haven been rather poor.

BTW I hold many of the high P/S stocks we discuss but always curious to learn and improve.

To the Microsoft question, which is of course not prospective. But lets put it in a more extreme manner that supports very dramatically what 12x stated.

Lets say you bought Microsoft at not 10 or 20x but 30x revenue of $185 million (similar to where Zs and MDB and TTD etc are or recently were now).

That is a market cap, extremely "overvalued" of $5.550 billion (toss out enterprise value, just market cap).

Microsoft grew to ~$350 billion in market cap by 1999. So 14 years and appreciation of 63x. Now of course appreciation was probably much quicker earlier, and that would have eaten into later appreciation, but who would care!

The key is, like 12x described, is that the marketcap to TAM made MSFT quite cheap when one considers the incredible (1) CAP, and (2) growth rate.

But you know, in 2004 you could buy Microsoft for probably 20x earnings.

When would you have preferred to buy Microsoft? Turns out both times were good, but for different reasons. in 2004 Microsoft had to make a turnaround that was not so certain at all - and few envisioned the cloud titan at the time.

Meanwhile, while extremely overvalued, a market "darling" selling for more than 100x earnings (using an estimated margin for Microsoft at the time, and at a price to sale of 30x, from a $5.5 billion market cap, with revenues of $185 million...you probably did quite well for yourself.

Of course you probably would have sold out as things changed, growth slowed, etc.

Why is that? Its market cap consumed much more of its TAM, and more than this its growth in eating into this TAM slowed, not to mention later its CAP dramatically decreased (but in 1999 that was not the case).

Of course things are never as simple as we are describing them, but yeah, that is basically it.

Arista at $4 billion market cap and (outrageously overvalued) is a totally different animal from at $16 billion. These things are of course relative to the total TAM and how fast one can grow into that TAM, and high how the CAP is to protect superior returns.

I believe that puts 12x's point into a real world example that seems translatable to the experience of many of us.

And sure, not every "Microsoft" succeeds. That is the risks. But the risk is not being "overvalued". The risk is the business failing to live up to expectations. Whether under or overvalued the stock would disappoint if the business does not live up to expectations.

Microsoft split adjusted price on 12/7/1987 was $0.22/share. After 31 years, today's price is $104.82. The CAGR is 22% which is extremely good for 31 years. If we paid 3 times of the price on 12/7/1987 for split adjusted $0.66/share, the CAGR will be 17.8% for 31 years which is also extremely good and should beat every mutual fund. The lesson here is pick a long term winner is most important even you pay a very high price.

That’s 13% annualized. While it’s on the low end of what we’re shooting for it is above historical index returns at a time overall valuations historically are followed by smaller gains.

Salesforce.com had 748 million in revenue Had you bought at 20x revenue and held to today’s roughly 8x sales you would have enjoyed 21% annualized.</b<

12X:

Thanks for the post...but I think you are more supporting my/our point that high P/S stocks are a darin on stock performance. Your example is showing 13% and 21% annualized returns....that is assuming a straight line (which we know it isn’t) and that these stocks last 10 years to see all this success unimpeded.

The only stock I am aware of off hand that started with a high P/S is ZS....it has severely underperformed MDB, TTD, TWLO, etc......despite very similar growth rates.

Can you provide other examples of stocks with P/S of 25 that have performed well over 1, 3 and 5 years?

Regarding market cap to TAM.....seems like a nice concept but TAM is way way over abused buy these companies that tout massive and completely unrealistic TAM’s. Without some objectivity, it seems a very slippery slope to make compete WAG IMO.

Ok, market cap to TAM is a key metric. But valuations do matter IMO and markets have gone through extended periods of low or high stock valuations. In the other thread I asked something along the following lines:

What has been the historically average P/S for a tech company growing at 50%+/y with $100M+ in annual revenue? How long does it typically maintain that P/S?

Why is this of interest? Because huge TAM, high growth rates are not unique to our companies. Many companies have experienced similar combinations in the past. If the answer to the above question is a typical P/S of 10 is the norm for such a growing company then the current valuations are stretched (perhaps due to a late stage bull market) and we may return to the historical average in the near term.

BTW MA had a P/S of 6-10 between 2011-16. But is now at 15. MA like FB has had ~40% net margins supporting its high P/S.

All these companies that had huge ps ratios then continued higher we’re doing something unique. AMZN had a ps ratio of 19 when it began trading but most likely was growing revenue much faster than MDB is now.

At the same time, it was a reseller with razor thin margins. So it should be trading at a lower ps ratio than a software co.

I agree P/S ratios have more weight than this “rule of 40” nonsense but it too is infallible.

I do not have the answer how to value MDB. It is a unique company doing a unique thing in basically a new industry where how big the market is remains to be seen. I am more concerned with competition and adaption rates as well as growth rates than I am valuation. If we had any accurate way to forecast so many unknown variables obviously it would be easier. But we don’t. Unless you could tell what the market will be say 5, 10 years from now. And how much MDB will capture. Also with

I just feel like I’ve left a lot more on the table by not participating in “overvalued” companies than I have saved by avoiding them.

This goes for the stock market as a whole. One could argue the stock market is overvalued currently. It’s the same concept. Usually when the market goes down they get them all right? That would include MDB! But it’s recessions or fear of recessions that drive market indices down. Not valuations.

Don’t get me wrong this discussion did give me pause but I don’t have a better solution at this time. I’m not going to sit down and calculate what MDB will be doing 10 years from now to get a proper valuation any more than I’m going to calculate next weeks lotto numbers. I’m certainly not going to sell it and buy also rans trading at lower valuations because they seem to get whacked just as bad when they disappoint. Unless maybe until you get to consumer staples or very stable companies that grow 5-10% a year. Certainly not pvtl.

What do you think MDB could be doing 10 years from now? If it could be much bigger than its current 4.6 billion market cap/260m run rate 10 years from now, the important thing is to not disturb the position. Even if it’s flat over the next few years, it’s why you have more then one position, and if it does go up, you still have it.

I don’t compare MDB to oracle. It is an entirely new solution to a problem if anything is complimentary. A solution to the unstructured portion of the volumes of big data that is growing every day. I have only seen forecasts to 2020, suggesting nosql will be a 4 billion market. If MDB can capture 1/4 of that it’s p/s goes way down. I have seen estimates that anywhere from 30% to 90% of data is unstructured data. It suggests to me the market MDB is in is very large. Large enough so that it could be much bigger than its current $4.5 billion market cap today.

This is why I don’t know how to value MDB. I don’t see it as stealing orcl market share but something to address what they are not. And I don’t know how big that market is, or how much MDB or even nosql will get if it.

They were obviously doing the right thing by giving it away free and monetizing it later. The goal was (and still should be) to get as many people on it as possible as soon as possible. This obviously lowered their rule of 40 score.

All these companies that had huge ps ratios then continued higher we’re doing something unique.

I disregard Amazon because of the Internet bubble. However, I went back to review David Gardner's first recommendation for it at a market cap of $850 million or so. Its price to sale was through the roof. People were panicked, and it was growing like nuts.

When I started in the market Amazon was already at $30 billion market cap. Yes, much higher market cap to opportunity than $850 million was, but less expensive (albeit still very expensive).

I am not so concerned with lower market caps. Either Mongo succeeds or it does not. There is no way to know, but we know it is doing something new, something big, something important as it is badly needed, and it is leading the world market in doing so with what seems to be increasing returns and very nice sustainable advantage that appears will grow stronger over time.

If it does this then the current market cap will be like looking at SHOP when it was overvalued with a huge price to sale at $4 billion itself. Or it can "tween" as the no longer used term can be applied to, and before moving into a still fast growing but more mature company at a much higher valuation its business model will start to fall apart. Unable to create earnings leverage, disruption from below, Oracle successfully re-architects postgres and takes over the market, or the CAP that is one of the primary hypotheses for this investment turns out to be untrue.

Whether it is presently selling at 18x trailing or 13x trailing, I do not think will make much difference. Now if it were selling at PSTG or Nutanix or Talend like P/S with all that appears to be going for it, then we would have to think real hard as to what is wrong with it.

I don't think it is much more difficult than that. If you want to use an Excel spreadsheet to statistically pick investments such as the algorithms do, then that is something else. Statistically you may be able to run some sort of regression (I am sure some hedge fund has done it, I once had a Chinese physicist tell me he would create such an algorithm and beat the market (think he is packing groceries presently) and create a market beating portfolio on automatic.

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However, if you are looking one by one on a personal basis as to the best investment opportunities, price to sale does matter to inform if there is a bubble, to inform if the company can grow into and make its present valuation seem like a distant memory in reasonable order, and to determine if there may be something wrong if it is just too cheap (Talend e.g. vs. AYX).

Another great example Talend v. AYX. Why was Talend so less costly by multiple than AYX? I mean, objectively, a year ago, why? Answer, the market picked the chafe from the chaft. It is possible that Talend would have outperformed market expectations and increased its multiple (Nutanix is doing it again) - but I believe a distinct minority of times this will happen. Far more than not the market knows something. I have seen it many times. And every time there is a chorus of people who jump on the bandwagon as this stock is a bargain!

Perhaps at times like that it is better to go cash because if you have to look to lower quality investments just to get a price to sale that you think will produce superior returns then the market as a whole is probably due to a downward correction (as there are upward corrections as well).

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Mongo to me is the sort of thing that Google can buy to gain entry into the enterprise, something Google is trying very very very hard to do. Thus market dominance and customer numbers and quality increase Mongo's buyout value. If Mongo can also leverage themselves into a cash cow sometime in the future, all the better.

True though, if Google bought them, there goes the TTD neutral vendor thing. But just a possible other example of value creation.

Enough. There is merit in price to sale, but I am not interested in creating an algorithm, but only in knowing if we are in a bubble. to me a bubble is defined as a valuation that is so high that it precludes any extraordinary returns going forward because the valuation eats them all up.

Dreamer has talked about Juniper. I saw Juniper at $50 billion and I went, whoa! So where is the future profit potential? That is its value in 10 years. And you could see that across the board. Ergo, a bubble.

My mistake at the time, being very naive, was to think the market would only crash in half. Even I figured out it was a bubble. But through that experience it also took my native ability that I appeared to have and hardened it and gave me the experience to look also for quality businesses that are sustainable, not just fast growing stocks.

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As such, no, I do not like Teladoc. I have given it a chance, and the latest news was the last straw. But yeah, its whole business structure is based upon using other people's money to buy loosely knitted "Uber" like groups of doctors who have (and will never have) a relationship with their patients.

I want telemedicine (and my health coverage is adding that benefit in 2019). But you know what, I also want it from someone who has my chart, my medical history (at a minimum) - please, at least a minimum - and someone who I know is good and competent. Teladoc does not provide this bare minimum. When I want a driver I just want someone sober, competent to drive, and not dangerous to me. Lot lower barrier to competence.

Thus Teladoc can never be the Uber of medicine. Something has to give with Teladoc.

That is the "hardened" me. I hope I am wrong. And this despite the fact that YES TELEMEDICINE IS HERE AND WILL ONLY GET BIGGER! I prefer however, software licensing side of Teladoc so that I can speak to a doctor within my own medical system. That way they have my chart, my history, can consult with my regular doctor if necessary, and I know the doctor is part of an organization responsible to assure competence.

TDOC is presently selling at a bit more that 6x enterprise value to revenue from the median analyst estimate for 2019. Is TDOC a bargain? Is the market just getting it wrong? Or, perhaps, are there real issues like I address above? I certainly cannot invest in TDOC as part of a more concentrated portfolio (not even if I held 10 stocks). Sure if I owned 15 or 20 I could, but the low price to sale appears to also indicate the market may sense some real issues here as well.

Hey, that is the way I see it.

TDOC at 6x is far riskier than MDB at 12x.

TinkerLeave it to me to bloviate on what was to be a short post. Thus I separated sections. Goodnight y'all from the frigid south. I hate winter in the south. I just need to move more south to correct for my initial misjudgments that winter in the south is as divine as 69...err, not sure what 69 references, but hear it used all the time. Peace.

I wasn’t around for the 1999-2000 internet bubble. But I have studied it a little bit. There are some similarities. Such as who cares about valuations? Or buying up promising young companies with no earnings for promise of future glory. But I think the big thing that is different is magnitude, which of course would mean a bubble and not something more rational. I think we are much more rational.

Yahoo was in fact growing revenues and even earnings at an amazing clip. Growing revenues by multiples. So the stock went up and up. Difficult to get FE/V ratios going back that far. But for context Yahoo was trading at $150 or so when this article was written. It peaked at around $500 right at the end of the year. It’s market cap closed at its highest level on January 3, 2000 at $125B. It’s revenue for the full year of 2000 was just over $1B. So at its peak if one had correctly guessed what Yahoos forward 1 year P/S ratio was it would have been 125. PS of 125! It would have been far higher on a TTM look back for them at that time. Many other of the bubble stocks were in the hundreds too. Doesn’t help that they got Googled a few years later.

That’s what an irrational bubble looks like. We are multiples less than that. Not going to speculate on what to expect from multiples going forward and what that ultimately does to returns. Until it gets to an utterly irrational level, I’m sticking to quality companies that have great growth and an intact company thesis. Though there may be times when I prune the growth if it looks to be getting ahead of the story.

Yes, Yahoo! Was the best of the best, one of the fundamentally most sound of any company in history and in a few short years it was taken down.

The big disruption was pay per click, but also the better search engine while Yahoo! Tried to become a media company.

I remember the peak marketcap and saying to myself, (had I owned it) SELL! I had one client, who was a secretary at Yahoo! Who did sell. She was worth $10 million when she came in for a consult. Others got lost in greed.

There is no comparison, at all, between the bubble then and the market now. The only complaint that people have is that there is a new business model that is disrupting the old world and growing rapidly with what seems to be with switching costs and enormous markets. And thus such companies get higher valuations...for shame.

No one could defend 100x revenues. And frankly Wall Street did not care. Literally, they hired young people right out of collect, as “analysts” and they would go to stock presentations and then take questions. The answers were pre-scripted and these “analysts” memorized them rote and gave the same response over and over again as if a politician or a criminal taking the 5th. I did not know any better at the time but it seemed so weird that way. A good question would be asked, and the analyst would give a rote canned response that was exactly as the prior response.

Wall Street was selling stock. Wall Street is a bit better today, but we all know that underneath it all it is know different. It will get away with anything that it can get away with.

If Zs, for example, could not easily grow into its present valuation (albeit that is the investment risk) then we would not even being talking about it. If Zs’s marketcap to real and raasonable opportunity was not as it is, and instead was like what was, we would not even being talking about it and I think even i would now be in cash.

As things stand now, it seems far more likely that the market is either going to sputter or crash rather than take off again. Hey, I am not blind to that. I just cannot spend my life trying to time the market. I just cannot do it. I am not a professional investor. And doing so becomes an obsession.

Ii invest. When I sense opportunity as I recently called the Zs and MDB bottoms, I go for it. When I get it wrong, i pick up the pieces and move forward. But I cannot sit around for weeks and months trying to deploy money at just the right time given the current trends. Frankly, this current bear like market has been called for every year since at least 2011. Perhaps they now got it right. Won’t matter if the business fundamentals hold. Will matter, bull market or not, if they don’t.

Either way, if not in a bubble, it all comes down to the business fundamentals. Arista, as an example is still a fine company with great cash flow, but as we all know it is no longer growing into its opportunity nearly as fast as it use to be, and frankly its opportunity to marketcap is not much smaller.

Bull market or bear market made no difference. You can see this with Arista throughout the year that is split up between bull and bear. Arista’s only exceptional move came when it was added to the 500, and thereafter, even in the bull portion of the year it settled back down consistent with its now more tame fundamentals.

Bull or bear, did not matter. It was the fundamentals. For those with less risk taking instinct and longer time frame, Arista may still be a clear market beating investment. But it is not the bull or bear that defined it, it is the fundamentals. I doubt anyone can make an argument otherwise with Arista or with Nvidia or with Talend.

There are other more ambiguous stocks like PURE that seems way undervalued, and yet the market persists bull or bear.

In the end, no bubble, it all comes down to fundamentals. Price and multiples tell us a lot about fundamentals - but they are only prognostications. But very good ones. Not perfect, but good. Thus that is not all we look at. But in the end, fundamentals in the context of growth and CAP and SAM (to counter the misuse of TAM)

The internet bubble was when I started looking at market caps to value companies.

The internet companies were truly confusing how to value because they were growing like 300% year over year. Or more. In an entirely new industry that didn’t exist that changed the way we lived over night. And many were losing money. So P/E ratios were thrown out the window. So standard valuation methods did not apply.

But there were clear signs of mania. Companies were putting .com at the end of their business name and seeing their share price go up 500% the day they made the announcement.

The thing I learned during the internet bubble is fast growing companies are difficult to value. Standard valuation methods do not apply. Also, as long as liquidity doesn’t become a factor, earnings don’t matter. If you think that’s nonsense consider there was a period when many thought anyone who bought stocks not paying dividends was reckless investing. They may as well have been gambling. The whole point to buy stocks was for dividends. The book “Theory of investment Value” by John Burr Williams, written in 1938 and the book Buffett based his valuation method on, argued a stock was worth the sum of all the future dividends it would pay subtracted by a discount for the time premium. Not earnings. I applied the formula to earnings and I found the formula roughly equates to a PEG ratio of 1 for your typical run of the mill 10% growers. And if it takes a few years before the company starts generating profit, who cares? All you have to do is factor the deficits into your formula. It’s not as though the losses come out of your own pocket!

I will tell you I was around during the internet bubble. And yes there were many who said valuations did not matter. These were the people who got swept up in the mania and thought the Internet was just going to grow indefinitely. It was clearly overvalued to me. It was clear we were seeing a mania. I do not feel that way now. Stock prices are high, yes. But the quality of the companies going public are much better and the stock returns and prices are much, much more realistic. Talk to me when MDB goes up 2000% in a single year like qcom did in 1999. You can just look at the charts and see the extreme difference in the markets between now and then.

With regard to “valuations do not matter.” I am not proposing that at all. What I am proposing is until you find me a better valuation tool I can rigorously and objectively apply to these fast growers I will continue to go by “gut feel.” The problem is you can’t. Because valuation requires prediction. Accurate prediction. And you can’t predixt this stuff.

The reason you’re hearing “valuation does not matter” is because valuations are the highest since the bubble. But so is revenue growth. This is the first time since 1999 that we have seen companies going public growing revenues at a 50% clip en masse.

The growth isn’t as high as the 500%+ like the aol, excite.com and lycos of yesteryear, but the valuations are also much more sane.

Bottom line is as more and more about a companies future becomes unknown, it becomes more difficult to value. After the financial crisis dust settled, I put a lot of focus on bank stocks. Those were a lot easier to value.

Quite frankly yahoo always sucked. They bought so many companies they paid billions for that a few years later they shut down. Geocities, overture, etc. poor management has always been their problem. They have (had) the worlds busiest website and squandered it.

Anyone who studies history and keeps an objective mindset will at least question what I’d going on. Surely the most conservative investors would have bailed MDB by now. But those are the people who will always be cutting winners.